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Kultur Dokumente
ECONOMICS
By
Amare F.
1
DEPRECIATION
An analysis of costs and profits for any business operation
requires recognition of the fact that physical assets
decrease in value with age.
This decrease in value may be due to physical
deterioration, technological advances, economic changes,
or other factors which ultimately will cause retirement of
the property.
The reduction in value due to any of these causes is a
measure of the depreciation.
2
Types of depreciation
1. Physical depreciation
Physical depreciation is the term given to the measure
of the decrease in value due to changes in the physical
aspects of the property. Wear and tear, corrosion, accidents,
and deterioration due to age are all causes of physical
depreciation.
2. Functional depreciation
One
common
type
of
functional
depreciation
is
Cont
SERVICE LIFE
The period during which the use of a property is economically
feasible is known as the service
life
Life, years
SALVAGE VALUE
Salvage value is the net amount of money obtainable from
the sale of used property or asset.
If a property is capable of further service, its salvage
value may be high.
If the property cannot be disposed of as a useful unit, it
can often be dismantled and sold as junk to be used again
as a manufacturing raw material. The profit obtainable
from this type of disposal is known as the scrap, or junk
value.
PRESENT VALUE
The present value of an asset may be defined as the
value of the asset in its condition at the time of valuation.
Book Value
The difference between the original cost of a property,
and all the depreciation charges made to date is defined as
the book value (sometimes called unamortized cost).
It represents the worth of the property as shown on the
owners accounting records.
10
Replacement Value
The cost necessary to replace an existing property at any
given time with one at least equally capable of rendering
the same service is known as the replacement value.
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12
Straight-Line
Method
it is assumed that the value of the property decreases linearly with
time.
Equal amounts are charged for depreciation each year throughout
the entire service life of the property.
..(1)
Where
d = annual depreciation, $/year
V = original value of the property at start of the service-life period,
in $
Vs = salvage value of property at end of service life, in $
n= service life, years
13
Cont
14
Cont
(3)
where
f = fixed-percentage factor at the end of the first year
16
Cont
Asset value
Va = V (1 - f)
(4)
(5)
(6)
(7)
Therefore,
f= 1- (Vs/V) 1/n
(8)
17
Example
The original value of a piece of equipment is $22,000,
completely installed and ready for use. Its salvage value
is estimated to be $2000 at the end of a service life
estimated to be 10 years. Determine the asset (or book)
value of the equipment at the end of 5 years using:
(a) Straight-line method.
(b) declining-balance method.
18
Method
Sum-of-the-Years-Digits
= 1+ 2 ++ n
19
Cont
Example
Consider the case of a piece of equipment costing $20,000
when new. The service life is estimated to be 5 years and the
scrap value $2000.
Find depreciation at each year.
Solution
The sum of the arithmetic series of numbers
1 + 2 + 3 + 4 + 5 = 15
Cont
21
Sinking-Fund Method
The use of compound interest is involved in the sinkingfind method.
It is assumed that the basic purpose of depreciation
allowances is to accumulate a sufficient fund to provide
for the recovery of the original capital invested in the
property.
(10)
22
Cont
Cont
Total amount of depreciation after a years = V - Va
(11)
CONT
25
CONT
CLASS WORK
The original cost of a property is $30,000, and it is
depreciated by a 6 percent sinking-fund method. What is the
annual depreciation charge if the book value of the property
after 10 years is the same as if it had been depreciated at
$2500/year by the straight-line method?
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